In this Edition
September 13, 2022

Self-Employed? Build a Nest Egg With a Solo 401(k) Plan

PODCAST: Energy Efficient Home Improvement Credit

Inflation Reduction Act Provisions of Interest to Small Businesses

Offset Nursing Home Costs With Possible Tax Breaks

Large Cash Business Transactions Must Be Reported to the IRS
Self-Employed? Build a Nest Egg With a Solo 401(k) Plan
Do you own a successful small business with no employees and want to set up a retirement plan? Or do you want to upgrade from a SIMPLE IRA or Simplified Employee Pension (SEP) plan? Consider a solo 401(k) if you have healthy self-employment income and want to contribute substantial amounts to a retirement nest egg.

This strategy is geared toward self-employed individuals including sole proprietors, owners of single-member limited liability companies and other one-person businesses.

Go It Alone

With a solo 401(k) plan, you can potentially make large annual deductible contributions to a retirement account.

For 2022, you can make an “elective deferral contribution” of up to $20,500 of your net self-employment (SE) income to a solo 401(k). The elective deferral contribution limit increases to $27,000 if you’ll be 50 or older as of December 31, 2022. The larger $27,000 figure includes an extra $6,500 catch-up contribution that’s allowed for these older owners.

On top of your elective deferral contribution, an additional contribution of up to 20% of your net SE income is permitted for solo 401(k)s. This is called an “employer contribution,” though there’s technically no employer when you’re self-employed. (The amount for employees is 25%.) For purposes of calculating the employer contribution, your net SE income isn’t reduced by your elective deferral contribution.

For the 2022 tax year, the combined elective deferral and employer contributions can’t exceed:
  • $61,000 ($67,500 if you’ll be 50 or older as of December 31, 2022), or
  • 100% of your net SE income.

Net SE income equals the net profit shown on Form 1040 Schedule C, E or F for the business minus the deduction for 50% of self-employment tax attributable to the business.

Pros and Cons

Besides the ability to make large deductible contributions, another solo 401(k) advantage is that contributions are discretionary. If cash is tight, you can contribute a small amount or nothing.

In addition, you can borrow from your solo 401(k) account, assuming the plan document permits it. The maximum loan amount is 50% of the account balance or $50,000, whichever is less. Some other plan options, including SEPs, don’t allow loans.

The biggest downside to solo 401(k)s is their administrative complexity. Significant upfront paperwork and some ongoing administrative efforts are required, including adopting a written plan document and arranging how and when elective deferral contributions will be collected and paid into the owner’s account. Also, once your account balance exceeds $250,000, you must file Form 5500-EZ with the IRS annually.

If your business has one or more employees, you can’t have a solo 401(k). Instead, you must have a multi-participant 401(k) with all the resulting complications. The tax rules may require you to make contributions for those employees. However, there’s an important loophole: You can exclude employees who are under 21 and employees who haven’t worked at least 1,000 hours during any 12-month period from 401(k) plan coverage.

Bottom Line

For a one-person business, a solo 401(k) can be a smart retirement plan choice if:
  • You want to make large annual deductible contributions and have the money,
  • You have substantial net SE income, and
  • You’re 50 or older and can take advantage of the extra catch-up contribution.

Before you establish a solo 401(k), weigh the pros and cons of other retirement plans — especially if you’re 50 or older. Solo 401(k)s aren’t simple but they can allow you to make substantial and deductible contributions to a retirement nest egg. Contact us before signing up to determine what’s best for your situation.

Amanda Farley, CPA
D 920.337.4554
PODCAST
Energy Efficient Home Improvement Credit

The recently signed Inflation Reduction Act included a lot of green provisions. This week we talk about the changes to the Energy-Efficient Home Improvement Credit for 2023.
Inflation Reduction Act Provisions of Interest to Small Businesses
The Inflation Reduction Act (IRA), signed into law by President Biden on August 16, contains many provisions related to climate, energy and taxes. There has been a lot of media coverage about the law’s impact on large corporations. For example, the IRA contains a new 15% alternative minimum tax on large, profitable corporations. And the law adds a 1% excise tax on stock buybacks of more than $1 mi llion by publicly traded U.S. corporations.

But there are also provisions that provide tax relief for small businesses. Here are two:

A Payroll Tax Credit for Research

Under current law, qualified small businesses can elect to claim a portion of their research credit as a payroll tax credit against their employer Social Security tax liability, rather than against their income tax liability. This became effective for tax years that begin after December 31, 2015.

Qualified small businesses that elect to claim the research credit as a payroll tax credit do so on IRS Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities.” Currently, a qualified small business can claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer's share of Social Security tax.

The IRA makes changes to the credit, beginning next year. It allows for qualified small businesses to apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit can’t exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward. This provision will take effect for tax years beginning after December 31, 2022.

A qualified small business must meet certain requirements, including having gross receipts under a certain amount.

Extension of the Limit on Excess Business Losses of Noncorporate Taxpayers

Another provision in the new law extends the limit on excess business losses for noncorporate taxpayers. Under prior law, there was a cap set on business loss deductions by noncorporate taxpayers. For 2018 through 2025, the Tax Cuts and Jobs Act limited deductions for net business losses from sole proprietorships, partnerships and S corporations to $250,000 ($500,000 for joint filers). Losses in excess of those amounts (which are adjusted annually for inflation) may be carried forward to future tax years under the net operating loss rules.

Although another law (the CARES Act) suspended the limit for the 2018, 2019 and 2020 tax years, it’s now back in force and has been extended through 2028 by the IRA. Businesses with significant losses should consult with us to discuss the impact of this change on their tax planning strategies.

We Can Help

These are only two of the many provisions in the IRA. There may be other tax benefits to your small business if you’re buying electric vehicles or green energy products. Contact us if you have questions about the new law and your situation. 

Lance Campbell, CPA
D 507.252.6674
Offset Nursing Home Costs With Possible Tax Breaks
If you have a parent entering a nursing home, taxes are probably the last thing on your mind. But you should know there may be several possible tax benefits.

Medical Expense Deductions

The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other qualified expenses, exceed 7.5% of adjusted gross income (AGI).

Qualified long-term care services are those required by a chronically ill individual and administered by a licensed health care practitioner. They include diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal care services.

To qualify as chronically ill, a physician or other licensed health-care practitioner must certify an individual as unable to perform at least two activities of daily living (ADLs) for at least 90 days due to a loss of functional capacity or severe cognitive impairment. ADLs include eating, toileting, transferring, bathing, dressing and continence.

Long-Term Care Insurance

Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to limits) to the extent they — combined with other medical expenses — exceed the percentage-of-AGI threshold. Such a contract doesn’t provide payment for costs covered by Medicare, is guaranteed renewable and doesn't have a cash surrender value.

Qualified long-term care premiums are includible as medical expenses based on the age of the individual. For 2022 for those 61 to 70 years old, the limit on deductible premiums is $4,510 and for those over 70, the limit is $5,640.

Nursing Home Payments

Amounts paid to a nursing home are deductible as medical expenses if a person is staying at the facility principally for medical, rather than custodial care. Also, for those individuals, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense. If the individual is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.

If your parent qualifies as your dependent, you can add medical expenses you incur for him or her to your own medical expenses when calculating your deduction. We can help with this determination.

Head-of-Household Filing Status 

If you aren’t married and you meet certain dependency tests for your parent, you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than filing as single. You may be eligible to use this status even if the parent for whom you claim an exemption doesn't live with you.

These are just some of the tax issues that may arise when your parent moves into a nursing home. Contact us if you need more information or assistance.

Dave Fochs, CPA
D 507.252.6688
Tax Tip Tuesday - Video Short
Student Loan Relief

This week, Cole discusses the basic facts regarding the Biden administration's student loan debt relief plan.
Large Cash Business Transactions Must Be Reported to the IRS
If your business receives large amounts of cash or cash equivalents, you may be required to report these transactions to the IRS. Here are some details.

The Requirements

Each person who, while operating a trade or business, receives more than $10,000 in cash in one transaction (or at least two related transactions), must file Form 8300. What constitutes “related transactions?” Related transactions are conducted in a 24-hour period. But transactions that occur in a greater than 24-hour period may also be deemed related if the recipient knows, or has reason to know, that the transactions are connected. 

To complete a Form 8300, you’ll need certain information about the person making the payment. This includes a Social Security or taxpayer identification number.  

Reasons Behind the Reporting

Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”

It’s important to keep a copy of each Form 8300 for five years from the date you file it, according to the IRS. Contact us if you have questions related to form retention. 

“Cash” and “Cash Equivalents” Defined

For Form 8300 reporting purposes, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders. Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.

Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.

Options for Filing

Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.

The IRS also reminds businesses that they can “batch file” their reports. This is especially helpful to those required to file many forms.

Setting Up an Electronic Account

To file Form 8300 electronically, a business must set up an account with FinCEN’s Bank Secrecy Act E-Filing System. For more information, visit the BSA E-Filing Systems website. Interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST). Contact us with any questions or for assistance.

Steve Arnold, CPA, EA, Certified QuickBooks Online Proadvisor
D 507.453.5962
More Resources from CPA-HQ
Too Much Inventory at Your Business? Trim the Fat!

Inventory is expensive, so it needs to be as lean as possible without compromising revenue and customer service. This article provides some suggestions to help businesses trim the fat from inventory and some useful inventory ratios for benchmarking and evaluating product mix.
A Family Budget for Your Needs - Today and Tomorrow

A good family budget should be simple yet comprehensive. As this brief article explains, this objective can be accomplished by addressing both the near term (such as day-to-day items) and the long term (such as college education and retirement).
Why an LLC Might Be the Best Choice of Entity for Your Business

A limited liability company can give you corporate-like protection from creditors while providing the benefits of taxation as a partnership. Can it work for you?